Bank Bailouts: It's Now Taxpayers Who Need Protection

Australia's big banks are resorting to threats in the face of a possible new bailout policy. But how profitable are our banks? And, for that matter, how safe? On both counts, the reality falls short of the image, writes Ian Verrender.

Call it an omen.

When German stayer Protectionist shot to the fore last Tuesday and bolted home, it perfectly captured the mood pervading the boardrooms of our major financial institutions.

They've been mumbling threats and shooting dark glances for months. But on cue, as they unveiled yet another round of stellar earnings results, the chiefs of our major lenders fired another volley over the heads of regulators.

This month, former Commonwealth Bank boss David Murray will deliver his verdict on exactly how much responsibility our banks - and their owners, the shareholders - need to take for any future mistakes.

Right now, the Big Four are in the happy position of being able to reap all the benefits when times are good, safe in the knowledge that should things sour, taxpayers will ride to the rescue.

No other business is afforded such delightful terms and, not surprisingly, our bank chiefs would very much prefer it if the protectionist paradise they now inhabit remains exactly as is.

It wasn't always this way. Before 2008, when the global financial system came close to imploding, there was always an understanding that governments would try to maintain order in the financial system. Exactly what that meant had never been spelt out.

But the $120 billion taxpayer bailout of Australia's banks during the crisis - that's the amount they borrowed using the taxpayer guarantee - changed all that. It set the bailout provisions in stone. Depositors were protected at zero cost to the banks. More significantly, the guarantees on offshore debt shifted all the risk from bank shareholders to taxpayers.

The end result? Banking, the riskiest business on the planet, has become the safest place to take a stock market punt.

Contrary to popular belief, Australian banking did not sail through the financial crisis unscathed. And despite the incessant claims from our top financiers, Australian banks are not safer or stronger than those in the rest of the developed world.

Without the intervention of the Federal Government, they all would have encountered serious difficulties.

St George was gone. So was BankWest. They were snapped up by Westpac and CBA, while a purchase of the listing Bank of Queensland was thwarted only by the Federal Government bailout. And as I pointed out last month, Macquarie came perilously close to tanking as it desperately lobbied for government protection.

Of the Big Four, each and every one of them was faced with the near impossible task of refinancing huge offshore loans at a time when no-one was willing to lend a cent, at least not on ordinary commercial terms.

Our financial system faced a catastrophic meltdown.

In his interim report earlier this year, David Murray made it plain that he didn't believe the hype about the impregnability of Australia's banks and the argument that, given they were so strong, they should not be subjected to harsh new global rules.

From Murray's perspective, they ranked about middle of the table on the global banking scale.

Since then, he's consistently dropped hints that our banks need to put aside more cash to cover themselves in the event of another crisis.

And if his Financial System Inquiry follows the lead from Canada, it could be that bondholders and investors rather than taxpayers will be forced to cover the costs of any future bailouts.

As far as our financiers are concerned, this is the banking version of Apocalypse Now, replete with Colonel Kurtz muttering: "The horror, the horror."

In the past week, they've upped the pressure. With NAB the only bank not to report record earnings, and with the Commonwealth on the way to breaking the $10 billion barrier, they've resorted to threats. The cost of extra protection will be passed on to customers.

But how profitable are our banks? And, for that matter, how safe?

On both counts, the reality falls short of the image.

When it comes to earnings, the Big Four have enjoyed a stellar run for four years. But lending conditions have been the worst on record. Business customers have shied away from debt. And until a year and a half ago, home loan growth was stagnant.

So how could earnings soar? Cost cutting has played a part. The overwhelming factor, however, is that as interest rates have dropped, the banks have cut their provisions for bad and doubtful debts. They've used an accounting technique to transfer money set aside to cover bad debts, and applied it straight to profits.

This year, accounting firm KPMG estimates the major banks between them have scaled back their bad debt charges by $1.6 billion.

Last year, Ernst & Young calculated they hacked $1.1 billion out of bad debt charges which investment bank UBS suggested was a primary driver behind the earnings growth.

Total aggregate bad debt charges for the big four have been whittled down to just $3.4 billion, a skinny reserve on any measure.

The spin from the banks is that this reflects their magnificent management in improving loan quality.

The reality is that once interest rates or unemployment rises, more customers will default and bad debts will escalate. That will force the banks to set aside extra cash as provisions, causing earnings to plummet.

When it comes to safety, our banks are plugged into the global system which automatically makes them vulnerable.

But, as Michael Janda last week highlighted, the offshore borrowing binge they've embarked upon in the past 25 years and the decision to feed most of that into Australian real estate has been a major factor behind the extraordinary rise in Australian housing prices.

Around 66 per cent of all Australian bank loans are tied up in mortgages over Aussie houses, hardly what you'd describe as a diversified portfolio.

Deakin University's Philip Soos has spent years charting the increasing reliance of our banks on offshore funding and their obsession with channelling it into real estate.

He questions the wisdom of a decision by global banking regulators in 2006 to downgrade property loan risk - just as the American property market was fracturing - that has enabled Australian banks to now hold wafer thin buffers over property loans.

That has left them with virtually no margin for error and allowed them to leverage themselves to the hilt.

Most economists are obsessed with government borrowings but pay scant attention to private debt.

In Australia's case, foreign private debt - the bulk of it borrowed by our banks - now stands at about 85 per cent of national output while government debt is around 20 per cent.

Government debt across the eurozone and the US has risen enormously since the financial crisis. But that's because their banks ran into trouble and transferred the debts to governments.

As a nation, we've become a one-trick economy with one major customer, shipping unprocessed dirt to China.

It's allowed us to borrow vast sums from abroad and pour it into real estate, now among the world's most expensive. And we have a cabal of banks determined to keep it that way.

rattan:

Peter NQ:

10 Nov 2014 12:57:31pm

Actually I think the massive overhaul shouldn't affect the taxation system and "the people". it should be simply to make the banks not for profit. Excess profits are redistrubuted to the customers of the bank in either lower credit rate or higher deposit rates.

barsnax:

10 Nov 2014 2:07:54pm

It used to be like that. Customers would get interest on the lowest amount they had in their account for the month. Now you get charged a fee for having the privilege of having your wages put into an account

I've always thought it strange that if you owned racehorses you couldn't be the Minister for Racing or if you owned shares in a mining company being the Minister for Mining and Resources maybe considered a conflict of interest, but it seems owning large amounts of property negatively geared for individual tax purposes doesn't rule you out from being Treasurer.

rattan:

sdrawkcaB:

Andrew Thomas:

10 Nov 2014 12:10:39pm

Hi sdrawkcaB,

Thankyou for pointing this out.

I have never understood why it is that farmers are a protected species. Just last week, colleagues of mine were made redundant because of the ongoing effects of the end of the mining boom. These were not miners, but highly qualified professionals. And in response, there were no media reports, no local MPs rallying to their cause, no support for their families or mortgages. They were left to their own devices and quickly forgotten. Such is the reality of the private sector when businesses become un-viable.

However, I am well sick of hearing about the poor old farmers and how hard it is for them. It isn't exactly all strawberries and cream for small business owners who are regularly pushed to the wall. But somehow, farmers seem to think their a special group, and the only ones who understand true hardship (apparently decisions to trash soil and purchase marginal land isn't really their fault). It would appear that the rules of the market economy apply only when convenient, particularly where the re-election of National Party MPs are concerned.

Robert:

10 Nov 2014 12:49:08pm

Farmers produce food without which you and your colleagues cannot live, unless you happen to produce your own. In the scheme of life and survival your mining, professions, businesses and bankers are irrelevant.

Julian:

10 Nov 2014 1:26:27pm

True up to a point, but then you do see many tractors on farms. Do farmers mine their own steel, synthesise their own rubber or produce their own diesel? There are similar arguments to be made about communications, weather forecasting, fertiliser (organic farmers aside) and so on, all of which depend on other industries. Unless you think our hardworking farmers could or should go back to horsedrawn plough and wooden hoe I think we have to accept that the modern economy is pretty interdependent. The argument about farming as a holy cow is a bit simplistic.

Stuffed Olive:

10 Nov 2014 4:34:24pm

Been a long time since they got free handouts AE. At best they are offered low interest loans which are short term and hard to get. A lot of wheat has always been grown in somewhat marginal areas but they are getting more marginal with climate change. Some of them are probably up the proverbial creek along with some cattle operations. We export a huge proportion of agricultural production but if you believe we should not be self sufficient in food I think we will be in for big trouble.

Andrew Thomas:

10 Nov 2014 6:41:04pm

Robert,

Do you see a doctor? Is it in a buidling? Have you ever needed an ambulance? Do you use electricity? I could go on like this forever.

Sorry mate, farmers are an important part of society, but no more necessary than anyone else. Lets also remember that farmers benefit greatly from engineers, scientists, medical proffessionals, etc (though I tend to agree with your regarding bankers). And I stick by my comments. Farmers are not special, and are no more entitled to handouts than any other person who makes a contribution to society through their toil.

septumis bent:

10 Nov 2014 11:12:42pm

You miss the point. Australia has exported jobs since we started dismantling trade barriers in the 1970s. But somehow we are always ready to bail out farmers when they strike drought, floods and the natural risks of their chosen work. The reality is that Australia could import all the food it needs, and it would be cheaper on the supermarket shelves. Now, I don't believe we should go down that path, but the question is why prop up farmers when we don't prop up manufacturing or small business?

ram:

10 Nov 2014 1:51:00pm

Most Australian "farmers" are miners -- by over-producing and over-stocking in a non-renewable fashion they are mining the soil. That has traditionally been the path to "riches" in Australia. Come from overseas with a swag of cash, buy land and/or mineral rights, rape the land, and then leave to go back to the "motherland". Its the traditional colonial mentality.

Dazza:

ram:

10 Nov 2014 8:45:03pm

No, out of the water and minerals in the ground that together with solar energy formed the grass. The cows eating the grass produce the milk. It is biology, chemistry, and physics. If you keep depleting the soils the effect is the same as mining, it just takes a few more stages.

septumis bent:

10 Nov 2014 11:25:39pm

Heaven forbid that you might have actually read and understood ram's comment.

The reality is that land in Australia has been degraded by practices that might have worked in Europe and the USA where soils are deep and fertile. Ours are not. Mining the land is a reference to farming practices that do not keep the soils in a long=term sustainable condition. There is ample evidence of it in the erosion and salinity problems that plague much of our farming land. Taxpayers have picked up much of the bill for fixing some of these problems - salt interception schemes in the Murray Darling and many schemes to address erosion.

chalkie:

Removing the $1b subsidies to farmers - and the other 'disaster relief' payments will not change the number of farmers - but will lead to revaluation of the land that remains their largest cost.

The return on investment for farmers now is stagnating because land prices - increasing at 8%pa over the last few years - have squeezed ROI rates. However, dropping subsidies will force land to go to sustainable levels. Of course, a lot of (unviable) farmers will go to the wall (and take the banks for a bath too - boohoo), sell their land for a lot less than it costs now, and these new farmers will recapitalise and get returns on investment more in line with real costs of production.

septumis bent:

10 Nov 2014 11:17:30pm

"Farmers are people with multi-facteted expertise who work with the land such that it will be productive in perpetuity."

Well some are now. It hasn't always been the case - you only have to see the massive erosion gullies in the NSW tablelands to realise that. And it's still not the case for some private farmers and some agribusinesses.

Peter NQ:

10 Nov 2014 1:04:37pm

Farmers are important in one respect.. they are primary producers, as such they are not providing a 'service' as your professional mates, but providing a commodity. Farming commodities are typically used for life giving food, clothing or shelter and other basic needs.

So unless you have a thing against food, clothing or shelter, then I suggest you buy locally. There are good farmers and bad farmers sure, but when an industry as a whole is struggling, then unlike manufacturing, you just can't say "get lost" because you will probably starve as a result.

Comrade:

10 Nov 2014 4:02:06pm

Peter NQ,

"just can't say "get lost" because you will probably starve as a result"

Why, because nobody else in the world grows crops or breeds cattle? We can't import food the same way we do cars? If this drives up the price of food then other, more efficient farmers will take up the earth left fallow. How is that different to any other industry?

Don't get me wrong - I'm all for protectionism. Just against having one rule for manufacturing and another for farming.

jassycat:

10 Nov 2014 1:31:07pm

But Andrew - they have to pay all those school fees for their kids to attend those exclusive boarding schools. They ARE the aristocracy, after all. Of course the check-out chicks and labourers (to whom they wouldn't give the time of day) should pay to subsidise them when times are hard.

Tator:

10 Nov 2014 4:53:39pm

jassycat,

not every farmer actually has a choice of what school to go to. Many have no choice as they have huge commutes to attend schools in their locality, many of my school mates had hour bus rides in unairconditioned buses on dirt roads to attend school. The reason that most attend so called exclusive schools is that they are the only ones with boarding facilities. Here in SA there is a choice of only half a dozen schools with boarding facilities and all cost more than $20k in tuition. Many are forced to board due to the sheer lack of choice in subjects for year 12 in country areas due to small student numbers and that is even with the ones who leave to go to boarding school.

So it is not all about the old school tie in most cases, just an opportunity to get a education in the subject matter of their choice which may not be the case if they stayed at the local school, and it is not like they can just go to the school in the next district which may be over 100km away with no bus service nearby.

saywhat:

10 Nov 2014 1:57:26pm

Andrew.Ive also argued against handouts for farmers for the same reasons youve listed.

However I would like to think that every oportunity is given to our farmers to keep produce local. Like many people, I dont want to buy my oranges from the US. Consideration needs to be given to those in regional areas who dont have access to much work, or a variety there of.

The social costs, let on own costs to welfare are far too great.

In saying all this. There seem to be a lot of farmers resisting neccessary change. If the past 3 generations have dealt with sheep, theres no way they would consider beef. Despite it being more suitable to the land! Bizarre prejudices and comfort zones seem to come into their thinking

I think the answer lies with a type of scheme that rewards farmers who practice 'best methods'. The govt has access to expertise from the likes of the CSIRO (even in it diminished state) who could potentially guide farmers into efficiency.

Stuffed Olive:

10 Nov 2014 4:38:06pm

Many farmers do in fact transition from one form of farming to another. Climate change is seeing a lot of prime lamb areas turn to cropping. There is less wool production. Good/prime farming land is being dug up for coal. I think we have a problem. Farmers are smarter than you think.

Rae:

Stuffed Olive:

11 Nov 2014 8:30:45am

It has not been destroyed Rae - wool production has declined because demand has declined. Fat lamb production has declined because of climate change. You may have noticed that lamb prices have increased considerably. Despite all that our farmers are more productive than ever notwithstanding droughts and frosts.

burke:

JohnM:

10 Nov 2014 9:29:46am

Negative Gearing fits under the ATO umbrella of deductions available when you spend money to make money. There's nothing new in that. It's original intent seems to be related to trying to ensure that people had somewhere to live. renting used to be cheaper than paying a mortgage, but banks extending mortgage periods beyond the old 20 years (or 25 if you were really lucky) has closed that gap.

Capital gains tax? FYI, investment properties attract capital gains tax on the whole profit if sold within 12 months and 50% of the profit if held for longer. (Capital gains tax is a misnomer, it's actually capital gains income, taxed at the applicable rate for the income.) Also, don't merchants buy goods with the intention of selling them at a higher price? That's how it's always been, with or without capital gains tax. Why should some things be exempt and some not?

danni:

10 Nov 2014 9:57:12am

Hello JohnM,

The availability of claims for negative gearing in relation to existing housing and shares is a nonsense. The tax break creates no real employment in construction or facilitates no additional funding to companies (via IPO). All the lazy application of negative gearing has done is make existing property more expensive. Same with existing shares.

Here are some ideas:

1. make negative gearing claims only allowable for new dwellings & new share issue (IPO).

2. grandfather all other negative gearing in the system, say with 5 year phase out.

3. negative gearing deductions only to be made against asset in question, not against other personal income.

Re CGT discount:

The 2010 Henry Taxreview made some sound recommendations about CGT. From memory, if a 50% discount is applied to the capital gains income, then a lesser amount be allowed as a deduction (40% from memory).

There is now a backlog of some 1M potential first home buyers who are being denied reasonable access to affordable housing because of the skewed nature of the tax system and irresponsible lending by banks.

Peter the Lawyer:

He noted that the deduction for interest on real estate used to earn assessable income is the general deduction that everyonr uses.

I will add that it has always been a fundamental principle of Australian income tax law that deductions don't have to match income, so that an entity can claim losses from one activity against another. Why should negative gearing of property be different? Getting rid of the deduction would need a copious anmunt of new legislation and intriduce fresh layers of complexity to a law that is already incredibly difficult for most people to understand.

PW:

"because negative gearing and the capital gains tax discount on real estate has negative effects on the economy and the standard of living of Australian residents"

This is certainly arguable, and what is equally arguable is that its absence would lead to negative effects that are even worse, like serious rental property shortages.

For all the squealing about tax law going on, no Government, Labor or Liberal, has indicated an intention to make this change. There are good reasons for this. They know it will cause more problems than it solves.

mt_syd:

10 Nov 2014 12:41:48pm

"This is certainly arguable, and what is equally arguable is that its absence would lead to negative effects that are even worse, like serious rental property shortages. "

it is more than that, it is the whole point of the debate. For people to say that negative gearing should not be changed because it has been like that for a long time, or because it is consistent with other investment tax law is ridiculous

the serious rental property shortage argument is bunk, it is a whack-a-mole argument, completely unsupported by evidence of any kind. No doubt you will say that rents went up when the Hawke government stopped negative gearing for a brief period. But it turns out that those increases had little or nothing to do with that law - plenty has been written about this by serious economists, you only have to look.

PW:

10 Nov 2014 4:03:38pm

"If that group is forced to sell due to grandfathering of negative gearing, guess who will buy?"

1. Why would existing investors be forced to sell if negative gearing were grandfathered? Answer: They wouldn't. Even if it were abolished out of the blue, very few I suspect would be forced to sell. Housing is different to shares. Investors enter the market for the long haul.

2. At some point the new regime would kick in, whereby there is no NG. This would have the intended outcome of discouraging highly leveraged new investors from investing in property. The established players will easily get around it, with a bit of loan shuffling, as they are not negative geared currently. What is being assumed is that this would lead to a dramatic fall in house prices, but I don't really subscribe to that theory. Maybe a slight correction at most, but I'd be astounded were it any more than that. People tend to hang onto their property until they get what they want or close to it. Investors hang onto property forever to avoid CGT.

3. Those who could afford to buy under these circumstances would be very close to being able to afford to buy anyway. Meanwhile, with new players forced to invest elsewhere, you would almost certainly see a rental crisis in due course (not immediately, but it would gradually build up, just like it did in 1986). Those who can afford to buy will be fine, but those who can't stump up $50k plus would be screwed, unable to find a rental. This will lead to loud lobbying for the Government to build rental housing at taxpayers expense, which is the precise reason they invest in Negative Gearing now, so private investors will provide the rental housing the community requires and taxpayers don't have to.

Nothing to do with the tax breaks, which are exactly the same whether the property is new or otherwise. Investors buy established because there is less work to be done, and they cost much less. In short, far fewer headaches.

AE:

curly:

10 Nov 2014 4:11:06pm

is it right that a very prominent left has five investment houses? I would hazard a guess that they would be negatively geared, and why not. if all rental housing was provided by the public sector ,the cost would be huge .

WA Ideas:

10 Nov 2014 4:14:54pm

"because negative gearing and the capital gains tax discount on real estate has negative effects on the economy and the standard of living of Australian residents"

The capital gains tax discount was introduced to simplify the overly complicated indexation method for determining the amount of a discount capital gain that was to be included as statutory income. Prior to September 1985, there was no tax on capital gains and you could still claim deductions for negatively geared property and there was not the same housing price issues as we see today...

Commissioner of Taxation:

10 Nov 2014 12:36:09pm

"I will add that it has always been a fundamental principle of Australian income tax law that deductions don't have to match income, so that an entity can claim losses from one activity against another"

completely incorrect - if you are the owner of two separate businesses you cannot utilise the losses of business A to offset the gains from business B. Instead you are required, by law, to pay the tax due from business B and use the losses from business A to offset any "future" gains from business A (and not gains from current business B!)- you cannot "mix and match" to creatively reduce taxable income - you will send people (along with yourself) to jail with this ignorant advice.

PW:

WA Ideas:

10 Nov 2014 7:30:21pm

PW: "Two businesses are two different entities.

A taxpayer who earns a salary and has rental properties is the same entity"

That's not true. An entity (such as a company, individual or a trust (which is an entity for tax purposes)) can carry on multiple businesses under different trading names. A business is merely a collection of assets, such as goodwill, plant & equipment and trading stock etc. A business is not an entity in its own right.

septumis bent:

10 Nov 2014 11:38:20pm

"A business is not an entity in its own right."

Splitting hairs here. I'm sure PW was using the term 'business' to refer to seperate legal entities - corporations if you like. Two different legally established corporations are seperate legal entities. One individual is a single legal entity. Just as a single corporation can offset profits in one part of its operations with losses in another part, there is no reason an individual should not be able to do the same.

Oztraveller01:

10 Nov 2014 12:12:58pm

Affordable "owned" housing is in some regards a matter of superannuation - it fits in the ageing population debate. If one has access to either residence or equity in your home by a certain age, one's dependence on active income to fund rent is reduced. When one is no longer able to live without assistance, that assistance can be provided in the home, or by cashing in the equity, in a facility available to the public (whether publicly or privately owned and operated). One can't do that without active financial assistance from the government of the day through pensions if one is a perennial renter. Home ownership is a valuable part of individual savings, ie. superannuation.

clive:

10 Nov 2014 1:22:01pm

Too true.

The govt, by financialising shelter, has effectively removed the prime asset workers will require in the future as they transition from work to retirement.

The govt is creating a 2 tier economy, serfs and lords, work till you drop employees who will most likely be unable to retire and petty landlords depleting all capital in the system through rentier behaviour - all created by the tax system. Brilliant not.

Peter:

10 Nov 2014 10:55:56am

@JohnM, uh, negative gearing by property investors reduced personal income tax revenue in Australia by $600 million in the 2001-02 tax year, $3.9 billion in 2004-05 and $13.2 billion in 2010-11. If you don't think that is a worrying trend, then I would submit that you are deluding yourself.

mt_syd:

10 Nov 2014 2:00:21pm

"You missed the point about building public housing"

Investors do not for the most part build new dwellings, more than 90% buy existing properties in direct competition with people who want to buy a home to live in. Negative gearing is a failure as a means to increase the housing stock.

PW:

10 Nov 2014 7:13:46pm

"Negative gearing is a failure as a means to increase the housing stock."

If that were its primary purpose you'd only be able to claim it on a new property, and I've no idea why it should be the responsibility of rental housing providers to increase the number of houses overall.

I think the primary purpose, like any deduction of expenses against income, is to allow the use of borrowed money to invest and thereby create assessable income. This principle exists throughout our economy.

A secondary purpose is to increase/maintain the stock of rental property, as distinct from the overall stock of housing, thereby freeing the Government/taxpayers of the burden of building masses of rental property to house homeless renters.

A further purpose is to subsidise renters, so that it is possible to rent a property for less than its actual cost. This compensates renters for the absence of tax free capital gains, which owner-occupiers benefit from, and in effect prevents renters from subsidising owner-occupiers.

AE:

10 Nov 2014 2:10:59pm

mt_syd

Education, schmeducation. Our kids have more pers student spent on them in real terms than ever, and theire performance is in relative and absolute decline. 10% more spedning doesn't automaticalle = 10% better students.

madmax:

Peter:

10 Nov 2014 1:41:06pm

Not $600m mate - $13.2 BILLION. A very worrying figure. If investors are rushing to pour their money into it at such a rate, you can bet your life that it is a rort. The proof is in the pudding, as they say.

Tern:

WA Ideas:

10 Nov 2014 4:22:46pm

Tern:

The costs of the rental property are directly attributable to the rental income. Owning a rental property is not a business and hence the non-commercial loss rules do not apply and the revenue losses that are attributable to the rental income stream are able to be offset against other sources of income for the individual.

GRF:

10 Nov 2014 12:45:34pm

The banks should more than just 'tough up'. Australia is in grave danger; we have the highest per-capita foreign debt in the world with net external debt in excess of 4 trillion dollars. And as the author has suggested, we have de-industrialised as a result of poor policy over a long period and rely on a single industry, mining. to service that debt.

To avert a complete catastrophe, bank profits need to be put aside as collateral and this needs to be legislated. There needs to be a progressive annual increase in the percentage of loans that are covered by bank reserves until something like 80% to 90% of their loan portfolio is hedged by bank reserves. The banks will do everything possible to try and prevent this but it must be forced on them. And it needs to be done very quickly.

clive:

GRF - that is the best idea I have read regarding what needs to be done. The lower Loan to Value Ratios (LVRs) go the better for us all.

Plus the idea of harvesting some bank profits for collateral - good.

That and a reintroduction of a "Glass-Steagall-style banking separation in Australia, to protect deposits and essential banking services from looming financial shocks" as promoted by Citizens Electoral Council of Aust in its recent petition to the Commonwealth Parliament.

True Liberal:

How unfortunate Evan's comment was on the top. It would have been much better to talk about just how much the banks are protected by the government and the taxpayer and whether or not this is ethical.

Australia's banks opitamise anti-market behaviour. They raise most profits from small minded cost cutting and dodgy cost shiffinn practices implimented by their anti-market CEOs. They stiffle innovation. And they rely on the tax payer to keep them safe. Hell, why not just make them part of the public sector? They seem to be run like they were anyway.

sdrawkcaB:

TrevorN:

10 Nov 2014 9:46:13am

It has always been thus, Realist: democracy was developed by the lower class to give themselves a fair go but the elite hijacked it for themselves, so then the workers invented socialism to get some of their own back. But now the elite has determined that socialism is too good for the working class and want it all for themselves. Thus both of these social and class movements have been stuffed up by the rich for everyone.

Gordon:

10 Nov 2014 11:45:41am

Actually democracy in Europe grew from Aristocrats and landowners to protecting their interests from the King (Magna Carta etc). Greek democracy was not about the working class, slaves, women or anybody except landowners. The founders of the US constitution were well-off merchants and landowners protesting taxation and the garrisoning of troops on their land and their dime.

Remind me again where Marx, Lenin & Mao came from the lower classes? Children of wealthy parents to a man, and it was the working classes who starved & died in their famines.

Bruce:

10 Nov 2014 12:20:26pm

If what you are saying is that the sacrifice of ordinary people has been abused by the Political-Economic-Legal-ly self-appointed Lords who have pirated the potential of peoples, places and times throughout history, I would agree with you.

What China and its people may suffer in the washout of The Great Leap of Economic Faith they are involved in now worries me sick.

What the people of the world have suffered from their local Lords trying to ape the American Dream - the reduction of an untapped continent in the pursuit of Property and the smallness of imagination that equates endless stuff with happiness - is an even greater tragedy.

People potential - which multiplies through good sociability and unselfish society - may still save us, but we have to give it that chance.

Politics, Economics and Law are the functionaries of overlordship and of prescribed forms of order. They assume the people must be led and they set apart the small group that would lead them.

I think its high time to trust in good common sense and sociability.

It will run rings round the ways we have repeated countlessly historically, with zero happy outcomes.

Peter the Lawyer:

10 Nov 2014 12:47:17pm

"People potential - which multiplies through good sociability and unselfish society"

That all sounds so vague and fluffy. When it comes down to it the 'workers' don't ever seem to want the hippy nirvana of co-operative yoghurt making and rainbows and lollipops for all that your staement conjures in our minds.

If they do rise up, they wannt to be oppressors in their turn.

AT the moment there is nothing stopping people with 'imagination' from getting together and developing scheme and non-profit bodies to make their society better.

That is what happened in Vioctorian and Edwardian times. But too many people are too ignorant or too lazy to shift for themselves. They expect the Government or private enterprise to think up things and do things for them.

Of course I'm sure that government actually stiflles some social solutions. For example, it should be possible for a group of local parents to get together and set up a system where mind each others' children. SOmething tells me, however, that the government would discourage this on the basis that they wouldn't be able to regulate such a thing.

We really are losing our initiative through letting government become so big.

Comrade:

10 Nov 2014 4:13:40pm

"That is what happened in Vioctorian and Edwardian times"

Yes PtL, when I read Dickens I think, if only life were so good today - damn those socialists for demanding and providing various, state provided good such as the old age pension, 8 hour day, living wage and universal health care.

(don't bother with pointing out the role of Conservative and Liberals in making some of that happen - I know. They were responding to the increasing electoral success of social democrats by adopting policies).

Pert:

10 Nov 2014 4:38:50pm

The other day at work, a thirty-something-year old kitchen hand was heard to say "I just hope that one day I can get a place like this, so that I can slack off like all of yousse [sic]" (referring to the two owners of the business and the Chef as they were having a meeting at the other end of the kitchen).

Never bothered to get any real qualifications, spent most of her life as a single Mum on a parenting payment (with four kids to three different fathers) and, before she started with us, hadn't worked since she was 19

Fair Work Australia has commanded that I must pay her $31 on a Saturday, $37.50 on a Sunday and $50 on a public holiday - to wash dishes!

The business employees six other people. 12 paid public holidays, 10 days paid sick leave, 4 weeks paid annual leave (plus leave loading), flexible working arrangements, penalty rates for 5 minutes of overtime and free staffie's on Fridays. These people still expect staff discounts on their days off, not only themselves, but also any other people they may be eating and drinking with as well as leave over busy periods with 5 minutes notice. It is a shame the business doesn't get a discount on their wages or is shown some appreciation by the staff throwing the business owners a Christmas party.

There is a sense of entitlement (underpinned by various legislation) that spans across all socio-economic classes. Why the responsibility for constructs, like "good sociability and unselfish society", must only be aimed at those at the upper end of the scale is beyond me.

Anyone who thinks that the working class are hard done by in Australia, needs to spend some time in the shoes of a business owner (the people that make the lion's share of the economy).

ozlilly:

10 Nov 2014 9:48:32pm

Or could be a small business which has bounced pay cheques on small group of 9 minimum wage employees. Well the business said never mind we will fix this a put wages straight into the bank. Yep some weeks it goes in sometimes it dosnt. Now no pay for the workers last week and the power is going to be cut off. Well off owners dont give a toss but I sure hope they get done for insolvent trading. No work tomorrow no pay and they get away with this. People with leave and long service leave, said to my husband when is the last time you checked super, bet that hasnt been paid either. Moral of the story not all business people are good people some are just using assholes that dont give a dam about their workers. Merry Xmas to these people. This stuff happens every day somewhere.

Gordon:

10 Nov 2014 12:52:18pm

Politics economics and law are the results, not the drivers. Human systems are made by humans, (who else?). If leadership is a factor in human affairs it did not get there by accident. I would love that sociability and commonsense could usher in a world of autonomous utopian pure democracy, but the actual history of the human race is that such systems are immediately dominated by someone who doesn't follow the script. People do not need Kings and emperors, but they prosper when there are non-arbitrary laws, organisers - and most importantly - a means of kicking out bad ones, and a means of concentrating, trading and applying effort. in short: law politics and economics. No-one promised they'd be perfect and the onus is on us to improve them.

Gordon:

10 Nov 2014 1:03:19pm

It is indeed what they did when they had the chance that matters. I'm sure they had all the correct ideas but did any of them ever actually serve the people (Ukraine? Tibet?) more than say a Churchill a Truman or a Roosevelt served their people according to boring old western democracy?

Steve_C:

10 Nov 2014 12:30:34pm

"Thus both of these social and class movements have been stuffed up by the rich for everyone."

What?

Is there no possibility that some of the butt-lickers amongst the working class not only aided in handing control of democracy or social services through deliberate collusion, but also mindless stupidity and/or total lethargy?!

I'd recommend a close viewing of the current add on TV that very clearly elucidates the carrot that's been dangled for donkeys years in front of those whose greed outweighs their common sense... You know the one: with the jingle about "we ALL want something better", as though anyone who's actually happy with what they've got is some sort of miscreant who deserves a good slapping around - or at least that's what the accompanying imagery indicates!

From my perspective, the 'fault' - if there actually be any; lies as much with the duped as with the dupers...

There is after all, only opportunity for the opportunists of this World if the opportunity presents itself!!

In human terms, that means there's only opportunities for those individual opportunists of our species to take hold of if other people hand the opportunity to them...

Just because they might lie and cheat and weedle their way further into the opportunity or to entrench themselves onto the gravy train, doesn't mean they crafted the opportunity.

The opportunists could have been confronted with the terms and conditions required to ride a train "meant for all", long ago by the passengers already riding the train... but like passengers on the trains of today; who hide behind their newspapers if something sounds like it could be 'controversial' or threatening to their peace and quite, or more often than not they seem to hope that everything will "just sort itself out", those who could and should have taken a stand didn't.

Why blame anything other than the gutless dweebs who whine like stuck pigs after they've been robbed by the rich, when they could have prevented the theft in the first place?!!

The 'vox populi' has rapidly become just a "pox-uli" that's like an immune system that is self harming... In that way, we're very much like overpopulated rats that start tearing into each other, rather than working together towards a common and far more beneficial result.

Gordon:

10 Nov 2014 1:13:12pm

Which is why competition is so important. No-one claims business is run by angels. Better that the devils fight each other to supply the customers needs than have time to sit around dreaming up ways to soak the taxpayer.

Comrade:

Gordon:

10 Nov 2014 6:26:51pm

If that were true it would have happened, done, finished game-over millenia ago. Humanity is inventive, new ways disrupt old ways, so the battle is evergreen. The trick is to encourage it, and to capture the benefit. Better to let your wannabe plutocrats battle to sell you burgers and iphones than battle to hold dynastic spots in an aristocracy, or chairs at the politburo table.

Comrade:

10 Nov 2014 8:00:18pm

Thanks Gordon,

Two points.

1) Capitalism is not millennia old - it is in fact relatively recent. Coupled with this, historically democracies are not especially long lived. I take your point about new ways disrupting old, but the essential "old" of concentrated power seems relatively constant.

2). The plutocracy may already be transforming into a new aristocracy. If wealth is concentrated (as it increasingly is) and if the return on capital is high enough, then the wealth becomes self-perpetuating. Picketty has demonstrated (for France) that the fraction of each birth cohort which receives an inheritance greater than the lifetime income of the bottom 50% of the population is increasing to early 19th century levels.

Peter the Lawyer:

Comrade:

10 Nov 2014 4:21:36pm

PtL,

On a daily basis.

It never ceases to amaze me how the small government brigade seems to think that private bureaucracy is so much superior to public bureaucracy, when the latter exists to serve the public interest, and the former to maximise profit - including concealing profits and rent seeking.

Alpo:

foolking:

10 Nov 2014 10:27:22am

Wouldn't a bank become a better long term investment if it had the money to support itself through crisis and then force its competitors to improve risk management? Isn't this exactly the checks and balances role that one would expect govt. to play?

The govt. could technically dump the bank and take on the housing mortgages couldn't it Forrest? it sounds a lot cheaper, why prop up a corporate interest, the stock market is not a guarantee of security, it is gambling after all.

David Kay:

10 Nov 2014 11:55:16am

Why not just to let businesses run by incompetents fail? So if the banks fail, we could compensate individual account holders and the shareholders could take the hit, like they would in a truly free market. And it could probably all be paid for with a minor levy on any financial institutions that are then able to offer that protection to their customers.

Why not let failed banks fail. What happened to that "creative destruction" that economic Darwinists preach? A nominally free market that is, in fact, distorted to protect the interests of already wealthy (and consequently influential) individuals and organisations is not a market at all, it's a racket.

Applaudanum:

10 Nov 2014 11:55:26am

A fall? Sure, you might get a fall of 5% or maybe even 10%, wiping out a whole 2 years of 'gains', whoopdedoo! The only people with enough stake in to fear such a fall is the real estate sector. Smaller commissions and fewer sales is all they fear.

Larger falls of the kind needed to put the fear into owner occupiers are dependent on larger-scale employment falls across the board. I'd like to see the 'get house prices down' cheer squad pop the champagne corks on rising unemployment.

Interest rates? They won't move upward very-far unless the rates overseas do the same first. Our rates have to be relatively competitive with the international market for 2 very important reasons; 1) if international rates are vastly cheaper, then international investors have an advantage over local investors, and 2) it wouldn't be that difficult for the international banks operating loans already in Australia to massively undercut the big 4. The government and the big 4 banks don't want that to happen, particularly point 2!

David Kay:

Gilly:

10 Nov 2014 9:19:59am

"Around 66 per cent of all Australian bank loans are tied up in mortgages over Aussie houses" Or in other words the majority of lending is directed at non productive investment. Surely investment in business and infrastructure is better for the country than housing. Yet the lending rates for business is higher than home loans, counterproductive to growing the future size of the economy.

AE:

10 Nov 2014 10:56:43am

Bizbob

What is it about people investing in property that you find so abhorrent? In our case, we are trying to have enough properties that pay significant rents for us to have a comfortable retirement - self-sufficient retirement.

rattan:

Blzbob:

10 Nov 2014 8:40:18pm

AE it keeps them poor and keeps them in slavery.

Rent should never be more than 25% of the minimum wage.

And with food prices about to go through the roof because of recently signed free trade agreements along with increasing prices on imports because of our falling dollar, and our increasing unemployment numbers, current rent prices are going to be pretty hard to find the cash to pay.

Not to worry, your rich mates will continue to do fine, even if they are complaining much louder.

Curious party:

10 Nov 2014 1:49:04pm

Peter:

"They can't understand that a normal deductiopn is not a 'subsidy' but a normal part of the law law."

A normal deduction is precisely a subsidy. The whole purpose of tax deductions is to prevent taxation from stifling productive economic activity. Thus the cost of taxation is subsidised by the government.

But tell me this: what exactly is economically productive about buying existing housing stock and getting tenants to subsidise the cost of acquiring said housing stock? I believe that it is the very definition of rent seeking is it not?

Incidently, the banks may well pay tax on the interest paid by the investor. But a) they pay the lower corporate tax rate and b) they have so many tax 'minimisation' (avoidance) mechanisms legislated for them that their real tax rates are much much lower.

And for the record: What the left really can't understand is why the right continue to try to propagate the delusion that the economics game isn't stacked heavily in favour of those who already have wealth.

And if you really can't see how heavily it is stacked in the favour of the wealthy, then answer me why the types of costs incurred by us wage earners in the course of earning our wages AREN'T subsidised by the government? Why can't I claim my health, transport, food, and accommodation costs as tax deductible? Without these costs I am unable to earn my income.

Stuffed Olive:

Nova4avr:

10 Nov 2014 9:21:44am

One of the main reasons for the GFC was deregulation of the banks in the US. This started with Reagan & was continued with other US presidents & was further deregulated with the George W Bush administration.

We deregulated the banking industry here as well & now we are seeing what could happen if there was a major downturn again in world conditions.

I believe Greenland let the banks fail during the GFC rather than bail them out & apparently that was a better course of action as the overall fall out damage was far less than those that bailed out their banks.

For some completely unknown reason we seem to have to deregulate everything & no one ever seems to ask why did we have regulation in the first place. The reason we had regulation was that it is necessary & should be maintained.

John:

10 Nov 2014 12:45:45pm

No, Nova, it was under Clinton's administration and in response to Clinton's demands.

"In 1999, Fannie Mae came under pressure from the Clinton administration to expand mortgage loans to low and moderate income borrowers by increasing the ratios of their loan portfolios in distressed inner city areas designated in the Community Reinvestment Act (CRA) of 1977".

Curious party:

10 Nov 2014 2:10:58pm

John:

There were a number of options available to the banks when faced with such requirements imposed upon them:

1) They could bundle all of those bad loans together and pretend that that made them a solid investment and start building a huge house of cards by selling those new 'products' on to other banks and investors and thus guarantee record profits for selling garbage.

2) They could have accepted that a certain percentage of their loans would be bad and have to be written down, and thus made less profit but maintained their stability.

Remind me which option they chose? And remind me why the government didn't see what they were doing and take steps to prevent it? Could it be because they had no capacity to do so after so many of the banking regulations were removed?

Carter's policy was implemented to maintain the illusion of the 'American dream'. The shattering of the 'American dream' (aka the illusion that home ownership and subsequent prosperity is possible in an economy that is so beholden to the interests of the wealthy) could have led to widespread discontent with the economic system that allowed society to become so unbalanced in the first place. Neither side of politics wants that to happen. (Or, Carter and the Democrats didn't have the foresight to realise that the actual answer to the impossibility of home ownership was to increase incomes for the poor.)

John:

10 Nov 2014 8:31:50pm

They did not have an option, Curious.

The legislation introduced by Clinton placed a number of obligations upon the banks. First, the banks had no choice to, as you put it, accept that a certain percentage of their loans would be bad because issuing loans to the lowest socio-economic borrowers was an obligation. Second, the banks were given ratings by the Clinton administration based not upon profit, or ethical trading, or commercial prudence, or even simple old common sense. The banks were rated simply on how they had complied with the legislation to make those extremely doubtful loans.

I don't doubt that your first point, that the banks bundled up those dodgy loans and shuffled them off to whoever they could in the hope of getting rid of them, but the fact remains that they were compelled to take them on in the first place.

In September 2013 I was in the USA and had cause to visit Detroit. It's an extremely depressing city, with rows and rows of abandoned houses that have been vandalised and covered with graffiti in suburb after suburb. The focus speaker at the Conference was a former City Councillor and he told us that all those homes had been sold to people who earned less per week than the mortgage repayment. They obtained loans because the banks were forced to issue them, without any reasonable chance of the loans being honoured.

Sea Monster :

10 Nov 2014 9:27:56am

Here's the game. Banks don't make profits. When they blow up every 10 years they lose more than the 'profits' the made in the good years. In the good years management takes stupid risks so that it can skim bonuses and run. And there's no recourse for the rest of us mugs.

So let's do what Switzerland did. If a bank blows up or needs government help, take back bonuses. Problem solved. Watch how quickly they stop taking stupid risks. Further step. If any business receives it expects government assistance; pay management according to public service pay scales. Its immoral that truck drivers and check-out operators subsidize multi-million remuneration packages through the tax system.

Maynard:

Sea Monster :

10 Nov 2014 11:21:00am

No Maynard, its the entire banking system and its at least once a decade. Unless you think St George, Bankwest, Macquarie, Lehman Brothers, etc were state owned labor controlled banks and 2008 was two decades ago.

Sea Monster :

10 Nov 2014 12:27:59pm

So that's one bank. But I'm talking about the banking system generally. As is this article. If you want to undermine my theory you need to deal with all banks and all crises. I seriously don't know what you're trying to say. Are you saying their wasn't a big global blow up in 2008?

Maynard:

Sea Monster :

10 Nov 2014 2:13:42pm

Maynard and Cat. Did you read the article. Macquarie would have blown up if not for government intervention. Bankwest and St George if not for funds from their acquirers. The big banks would have been in deep do-do if not for government guarantees.

If you can't get your heads around these simple facts we're just going around in circles.

Westpac incidentally was on death's door at the time the state banks fell over. It made the same rash decisions in the same asset bubble. The other majors were seriously crook to. If not for the nudge and wink decision to leave official interest rates higher than justified they too may have died. We let mum and dad mortgagees go to the wall to save the banks and the hides of their management.

Machiavelli's Cat:

Spinebill:

10 Nov 2014 8:29:36pm

State bank Victoria

Both political parties have to bow to the banks and the corporate sector , both for different reasons. The ALP fear 'capital flight' and the subsequent LNP propaganda. With this invisible cudgel they have been Shepard'd over to the Right, to suit capital over labour.

Just after the vic bank collapse, came the subsequent petrol levee, the surprise election when Kennet got in followed by Howard and the demutualization of our civil democracy began in ernest.

anote:

10 Nov 2014 10:16:32am

"Who is more culpabable: the banks which asked for the gurantee or the Government that gave it?" The banks, who were in the position of high potential of failing and thereby creating misery for many. Of course the government should have prevented them from reaching that position with better oversight and regulation.

"And, would it be true to say that a guarantee does not actually lead to any expenditure by the government?" It would not be true, to which your third question attests. On top of administration costs (red tape) it depends on whether the guarantee needs to be called upon.

"Thridly, would the government itself have borrowed those funds if the banks hadn't done so?" To do what? Become a bank shop front? The government would have had to borrow money to meet the guarantee

if the banks failed to repay.

From which one should conclude that it is appropriate for the government to change rules to give to better protect the tax payer without the banks squealing; the point of the article. Hopefully it will do so and also better protect customers.

Peter the Lawyer:

10 Nov 2014 1:11:19pm

I seem to recall at the time that the government was roundly criticised from the right for giving the gurantee. There was a lot of controversy over the fact that the gurantee was only given to ADIs and not other finacial instittuions. This caused a lot of trouble as people moved their money to ADIs.

anote:

Peter the Lawyer:

10 Nov 2014 4:12:46pm

I am attacking the guarantee, which was a really silly piece of policy that wasn't needed. The Rudd Government should have stood up against the banks, as that was supposed to be the Labor way. But then, instead of giving a fair guaratee to all finacial institutions they limited it to the banks. So we got a bad policy poorly implemented, which caused a lot of grief om the markets and left a lot of people stranded.

anote:

10 Nov 2014 6:00:54pm

I see Peter the Lawyer. So you are not attacking the fact that a guarantee was given, just that the guarantee was limited. It was criticised by some but "roundly criticised" is a exaggeration. That might be a fair criticism, however you have not explained it.

Now you are fond on attaching wrong to the "left", a version of ad hominem attack; something you like to criticise others for from time to time. Also, at that time the opposition criticised everything Labor did just for the sake of opposition.

Given that the guarantee is not the kind of thing the 'right' is about and given that you have not explained why the guarantee was OK at all, from your perspective, you are hardly clear or consistent.

Wave2me:

"From which one should conclude that it is appropriate for the government to change rules to give to better protect the tax payer"

And here is the crux of the problem.

Does the proposed rules achiever this end.

My opinion is, they do not even come close.

The issue was caused when banks in other countries, lent massive amounts of money to people who could not pay. They also lent massive amounts of money for the construction of both residential and commercial properties, way in excess for demand, causing huge vacancy rates. These two things led to huge default rates, and huge drop in property values. (In the USA,Ireland and Spain there are millions more homes and office space than there are people to occupy them)

Neither of these things occurred in Australia.

As all these lenders went broke, nobody wanted to lend money to banks or non bank lenders, so in many countries the governments bailed out banks, nationalized them, and gave a government guarantee. This resulted in some of the worst hit banks being able to raise money, and get deposits, while money was being withdrawn from otherwise sound banks and non banks in Australia.

So the Australian Government gave the Guarantee, which stopped the flow of money out of the country, and allowed the banks to raise funds and deposits. The government charged the banks for this.

The regulation and rules proposed does nothing to strengthen a bank against this sort of problem.

Not only that, there are huge problems around how to apply these regulations, the reserve is a backstop in case of emergency, so what does a bank do if there is an emergency. Under what circumstance can it use its emergency fund, how long does it get to top it back up, how does it top it up, what sort of asserts can it hold, what happens if those assets devalue, and so on.

The proposal wont help in the sort of circumstances that occurred in Australia, and wont stop the stupid lending practices that occurred in other countries.

Its a political fix, its about politicians being seen to be doing something, and being seen to be tough on banks. It has nothing to do with the actual problems that occurred.

anote:

Wave2me:

11 Nov 2014 8:10:00am

The rule changes are an international proposal, made before this government came to power.

The were developed by the countries that caused the problems in the first place.

It seems to me that adopting the USA and EU political fixes, when we didn't have the same problems they did, and we have whole rafts of regulation that they don't have, and have not plan to have, is a very dangerous idea.

We need to continue to develop our own regulation, as on the evidence I have seen, we do it far better the the EU or USA.

Blzbob:

Maynard:

10 Nov 2014 10:31:38am

It's called systemic risk and moral failure in lending PtL; it is a fact of banking and known for centuries. Banks cannot be allowed to fail and must carry a government guarantee. Pricing this guarantee and regulating the banks are the hard parts. I suggest a super profits tax plus appropriate regulation. We live in a mixed economy.

foolking:

10 Nov 2014 1:49:38pm

I don't actually believe you are for real Peter the Lawyer: Unless what you are saying that business must volunteer a portion of its profits and raise its ethical and moral values massively to fill the void. Is that it, or is that the people wet behind the ears can do it in their time off. Do what you ask?

anote:

Peter the Lawyer:

Putting the question after the answer? Not really, just using a bit of rhetoric to make things a bit more interesting and nuanced.

Tax is a revenue raising tool. Any use of it as a nudge mechanism is like tying your shoelaces while wearing boxing gloves.

The great Howard tax RATE cuts actually led to more government revenue because they stimulated economic activity. Don't you recall Rudd in 2007 telling us constantly how the Howard Government was a high taxing government?

anote:

10 Nov 2014 6:46:18pm

Peter the Lawyer,

Yes really, your reply comment to Maynard was the question in for which Maynard's comment was the answer.

As for rhetoric the reality of the euphemism "moral hazard", whereby capitalists privatise profits and rely on being bailed out by the taxpayer is widely commonly understood, whereas your "cutting taxes" is a mantra.

anote:

10 Nov 2014 7:52:08pm

Peter the Lawyer,

You are fond of using terms like "argumentum ad absurdum" as if to demonstrate that you have some superior understanding of valid logical debate and that others should concede to for that reason. That is itself a logical fallacy in the way you use the term logical fallacy.

In this particular case the quality of your initial comment invites a response like GJA. Your statement that cutting taxes would stimulate the economy far better than any government spending ever could is merely a your claim without basis; a mantra with evidence of failure (much like Reganomics).

GJA:

Maynard:

You are running two arguments here. Regulating government guaranteed banks and getting paid for it is different to general tax rates. It's rational not a left or right whinging thing.

Banks must get a government guarantee and it is reasonable that the super profits generated by this guarantee be taxed.

I never supported the idiot mining super profits as in aggregate and the medium term there are few profits in mining and should never be government guaranteed. I still have a gold mining lease and would gladly sell it to anyone stupid enough to buy it. It contains gold but not enough to cover production costs.

Henry wanted the ALP to have a share in it, no wonder he went banking!

Caffettierra Moka:

10 Nov 2014 8:05:51pm

We got tax cuts in 2008 and for the years afterward. We elected a Rudd government that committed to them. And we got a tax cheque for $900. So, that quick thinking and brave commitment by Rudd must have saved us? Right??

Crow:

dmans5:

10 Nov 2014 9:30:43am

Are tax payers protected from reckless spending and hasty dangerous policy of government. The "shipping of unprocessed dirt to China " is what saved us from a severe GFC , not the spike in gambling and Korean TVs purchases from stimulus cheques.Its now time to repay the stimulus cheques plus interest of $1,000,000,000 per month !

RobW:

10 Nov 2014 11:48:36am

"The "shipping of unprocessed dirt to China "

Except people forget that there were very real fears about the state of the Chinese economy at the time. Their exports were dropping and nobody knew what would happen. Yes, China went on to stimulate its economy and we've benefited from that, but when the Rudd government stimulated our economy it had no control over what the Chinese government would do. They only had control over their own response. Personally I wasn't a fan of where Labor spent the money, I think it could have been put to much better use, but people forget (or ignore) just how uncertain things were in late 2008.

rusty cairns:

I see there has been a lot of rejoicing by the thought of a trade deal which could see 1 million live cattle being shipped to China every year.

What a pity this trade deal doesn't come with a guarantee that an increase in beef meat processed in Australia is a requirement ?

I suspect in years to come the beef steaks for sale in Australia supermarkets will have the label of grown in Australia processed in China because billions of dollars will be invested in China's meat processing infrastructure while Australia's meat processing infrastructure will be starved of funds as investment is shifted to more live exports.

Is what Australia's manufacturing needs is more money spent importing in star pickets and fencing wire imported from China ?

I suspect the need for more profit will lead to one man on a computer controlling un-maned drones replacing helicopters and their pilots for round up and driverless trucks delivering cattle to the ports for export.

These trucks will be traveling on roads that have needed every cent gained in tax from the live exports and more to be upgraded and maintained, using driverless imported road graders from China, no doubt ?

What will be used to protected this perceived extra billion dollar a year live export industry if a prolonged widespread drought occurs ? It won't be the income tax of the Helicopter pilots or the truck and road grader drivers ?

Spinebill:

10 Nov 2014 8:42:41pm

And don't forget the super salesman of the year when Howard announced he'd locked the Chinese into a billion liters a year of our natural gas for a guaranteed .2cents a liter for twenty years. Great headline!

Handoyo:

Alpo:

10 Nov 2014 9:37:04am

We need a Financial Crisis Insurance Scheme whereby, BY LAW, ALL banks must deposit a certain percentage of their annual earnings into a Government-held account, administered by a special authority, perhaps in coordination with the Central Bank. Those funds will then be used for any help banks may require into the future in the face of an international crisis and in order to stabilise our economy. Every 10 years the amount available in the Scheme will be evaluated with regard to its capacity to withstand a crisis and if more money is needed, more will be asked, but if less money is really needed then some of that money will be returned to the banks.

Antman:

10 Nov 2014 9:38:56am

Excellent article Mr Verrender. While you cannot cover all the risks, another significant provisioning risk which gets zero air play is the cost of the cross currency swaps already entered into. As the $A continues to decline versus the $US, and at some point interest rates here rise, the amount the banks need to set aside on a mark-to-market basis ALSO rises in the billions.

Our banks are nothing more than processing centres. Bill Gates some time ago asked the prescient question - just because we need banking, why do we need banks?

They DO NOT take risk.

They DO NOT fund solar.

The list goes on.

And their fund management arms all buy bank shares. Which is where all our pension investments live

Peter NQ:

The effect of monetary policy is limited as it must always be filtered through the banks. Hence they can pick the prime slabs of money to pocket before passing the rest on to retail customers.

There are other ways to stimulate the economy beyond monetary policy as suggested by Hon Bob Katter... installing a domestic commodity reserve. He has expounded it for purely CSG, but it could be extended across all commodities:

Effectively mandate a percentage of commodities extracted to be sold on the domestic market. This would dirve down the cost of those commodities for domestic users as in the case of CSG, Coal and Iron ore we dont have the capacitiy to use the massive amounts being exported. Its effectively a tax, but one of a commodity so therefore hardly touchable. It also directly affects the real economy as these commodities go to produce steel and electricity. Imagine the effect on the economy if electricitiy were 1c/kWh?

Queensland had this during the 80s and was one of the main reasons why we could produce Aluminium here.

We could not export cheap iron ore and coking coal but also steel, aluminium and other more valued goods via manufacturing through nothing more than not selling every last piece of gas/coal/iron ore at the lowest possible world price.

Gordon:

10 Nov 2014 9:52:09am

Allowing banks to fail is a bit like population control. Everyone agrees it must happen sometime, just not me & not yet.

Amid a forest of more contestable statements there is one reasonable truth in Ian's article: the moral hazard of allowing someone to believe their losses are covered by the deep pockets of the taxpayer.

Ask yourself though, who would be screaming if a bank failed: millions of depositors, small and large businesses, mortgagees, retirees etc, i.e. voters, that's who. Rudd and Swann did not offer a bank guarantee because they love bankers dearly, but because a collapse would be catastrophic for ordinary people. Allowing firms to fail is from the libertarian play-book, not the social democrat one.

How our comfy cradle-to-grave welfare state (yes, including corporate and middle-class) perpetuates moral hazard and hides the consequences is a very worthy topic for discussion, and I look forward to the next installment from Ian V.

Reallist:

Gordon:

10 Nov 2014 12:14:39pm

No. My point was that anytime you seek to protect people from risk you are in certain cases unavoidably protecting them from the consequences of their own actions. You can't have a welfare system or a health system without helping the foolish was well as the unfortunate. You can't protect a bank's depositors and pensioners funds without also at least partly shielding the bank's executives and shareholders, because it is all the same animal.

mt_syd:

10 Nov 2014 12:54:43pm

the banking system as a whole needs to be protected because it is so central to the economy. Clearly banks are happy to be free riders on taxpayers - they do not protect themselves, so it falls to government to provide the necessary guarantees.

The beneficiaries are shareholders of banks who get to pocket bigger dividends.

The answer is some form of compulsory insurance. Pricing it properly is the difficult bit - leave that to the actuaries. But the effect should be that banks are sufficiently covered so that the banking system as a whole will be able to keep going in a credit crunch, and the cost of the providing the insurance is paid for by the banks themselves

Gordon:

10 Nov 2014 2:42:22pm

And so (as I said elsewhere, mods permitting) indeed it was. Charged by the RBA at a percentage but never used, the guarantee MADE $5.5 Billion for the taxpayer at no cost.

I really fail to see how this timely and appropriate Govt backing of our financial system has somehow been conflated with wholesale bailouts of bankrupt companies. No money changed hands, none. An emergency facility was established, never used, and the cover was paid for at a reasonable rate.

AE:

mahaish:

10 Nov 2014 4:34:57pm

no we dont ae,

when the loans officer at the bank makes a loan , he doesnt ring up its treasury ops to see if it can be made.

loans are made independent of the reserve position of the bank. loan is made first then the banks go loooking for the reserves later in the money market if there is a shortfall, and as a last resort they can go to the central bank for the funding, because the central bank has either a explicit or implicit gaurantee on the deposit base.

fractional reserve banking is sheer mythology propogated by austrain economists who have an axe to grind about the monetary inflation that takes place due to banks expanding their balance sheets by creating deposits and the central banks complicity in accommodating them.

mahaish:

mahaish:

as the funds flow through the banking system, it leads to a system wide expansion in the banking systems balance sheet. this is how banking system money gets created.

this doesnt mean our local banks can keep doing this ad infinitem, since there is a margin/risk weighting constraint that comes into play eventually, as well as th eportfolio shifting effects of central bank pricing.

the view you are expressing is often found in 1st year economics text books, and by economic commentators, even ones on this blog. but alas they are wrong.

whilst i agree with ian that offshore funding is probably not in the national economic interest, overseas borowing by our banks is an attempt to get around this pricing constraint, and unfortunately the target rate differential between us and other central banks, makes it inevitable, because of the greater profit.

one thing ian fails to mention is that , if the banks cant roll over their debt on international markets, they can sure as hell roll it over with our central bank. ultimately the central bank is their to gaurantee the payment system, and they have the power of infinite liquidity. furthermore the banking system has large holdings of government debt, which they can use for funding by undertaking a liquidity swap with the central bank. essentially swapping treasury debt for bank reserves.

so yes ian is right to be concerned, but i certainly dont think these problems are insummountable, and even less so if the government of the day is prepaired to target the unemployment rate as opposed to the inflation rate.

Bruce:

10 Nov 2014 11:48:14am

I think we need to put this discussion in terms of 'our society' rather than in terms of 'the state' or 'the welfare state'.

We argue so much in terms of Politics or Economics or Law, but these are made-up things, that are tailored or tailor themselves, to suit the 'rationales' that States and Welfare States rely on for their own validation.

People see themselves as Right or Left; White Collar or Blue; Professional, middle class, or workers; rich or poor - and all of these reflect 'positions' they claim or are consigned to by the made-up ways of made-up States of existence.

These States are unsustainable. Their 'ways' are too complex - too 'political' - and they interefere with each other so that the systems of these ways become vastly inefficient, huge and ineffective and ruinous to run. They compete with among themselves and with those ways of other States at great expense. And they have cost so much of the natural and 'popular' realities that they have become quite ridiculous.

What is sustainable is 'our society' - in a very different sense than a Political-Economic-Legal sic-society.

I think it is high time to forget about the wrinkles of our dominant ineptitudes and to set about thinking collectively on the society that could replace them.

foolking:

10 Nov 2014 1:18:53pm

Bruce: People develop a political language for nuance, and to effect change they all need to be considered. Also certain phrases or terminology set off alarm bells which I guess is partly what you are saying Bruce. I'm saying that each "dominant ineptitude" carries a seed of truth or value. Most of the posters must want improvements to our politics and contribute real insight, this is our society talking, we are all in stages of development, some of yours are beauties, thanks.

Crow:

Peter the Lawyer:

10 Nov 2014 5:26:39pm

What utter drivel.

The Coalition under Howard was the best government this country has had since Menzies if not since Federation. They left the Treasiury full and the regulatory system well structured so that we would withstand the Great Recession even with the inept Rudd and Swan at the controls.

Not Such a Golden Oldie:

10 Nov 2014 4:52:46pm

Since the so-called profession of economists is about as effective as the alchemists were before they learned the scientific method and morphed into scientists, I think you will be struggling to find an "outstanding" economist Oaktree.

I have been around through a lot of recessions, downturns, financial crises and invariably they are not forecast by economists, except very rarely by a very small minority who don't follow the herd mentality and are usually pooh poohed by their fellow economists.

If economists are unable to forecast the results of their policies, why do we listen to them or put them on pedestals. I still see the economists who were unable to forecast the GFC being interviewed on TV by interviewers in the most deferential manner, the same interviewers regularly chew up politicians, but are unable to ask a decent penetrating question of the interviewee economist.

foolking:

Well the list of where to start becomes a little clearer with articles like this.

No single political party can take on the big ticket items without being unceremoniously tipped out of office, or ridiculed to the point where aspirations of govt. are just fanciful.

The mature discussions that Mr Abbott called for have to include this one, too big to fail is the antithesis of capitalism and the very area that the coalition says is its specialty, economics.

The political engine that is running our country is in dire need of a rebuild.

End political donations, change media ownership laws and strengthen ethical/objective content provisions,including all advertising, until all parties agree on these changes, politics is in limp home mode.

Confused minds locked in repetition and obesity will prevail otherwise.

Peter the Lawyer:

10 Nov 2014 5:45:05pm

The problem is, Foolkin, that back in the day Government was much smaller and much less tied up with the economy. I also get the impression that in those days most Australians didn't really care that much about politics.

But now too many people think that politics is the be all and end all of life. Government is central to them. Therefore they come up with the solutions that you suggest. All of these of course will not give us the people more freedom but will perpetuate the idea that the solution to our problems lies with our government rather than with ourselves. Although I think you don't want it to happen what will occur with your changes is that we will become servants of the State (which the left will mistake for society) rather than the other way around.

One could argue that the last government tried a major policy shift or two in the belief that they would lose office as a result. They therefore tried to build in things that would make it hard for the next government to change their legacy.

foolking:

Gordon:

10 Nov 2014 11:15:54am

You undersell the skill level in our resource industries. If you think it is just "shovelling dirt" I invite you to have a go. The resources industries employ highly skilled tradespeople and many engineering and science graduates. They do not wield shovels I can assure you.

Manufacturing in Australia is being lost daily. This is not an either-or situation. Traducing our surviving high tech industry will not assist manufacturing to recover. The high costs and small markets that damage manufacturing and prevent further value-adding to mineral exports are created by other factors not our proficiency in mining. If someone wanted to re-develop (for instance) steel making here, are they somehow prevented by us also being good at mining the ore & the coal?

foolking:

Gordon:

10 Nov 2014 3:03:28pm

I share the sentiment believe me. That we used to do it in the past is even more frustrating. Setting up something here - an industrial process - is 2.5 times dearer than the US. Our construction and our waterfront is such that an entire enterprise will survive or fail by whether it can AVOID using Australian ships and fabrication, and any attempt to build anything attracts stupid green triangles saying No [whatever] anyway. It's enough to make a person weep.

Gordon:

10 Nov 2014 6:44:05pm

The point was the skill in operation and knowing where & how to dig, but I'll play: is it the miners fault that an Australian-made dragline is too expensive? Will running down the mining industry suddenly sell more Australian-made draglines - or less do you think?

Fact is significant parts of the supply chain are extraordinarily high-tech, mostly designed here, and wherever possible supplied here. If "where possible" could be even greater it would be fantastic. If someone would like to engage seriously with the productivity logjams that bedevil Australian industry it won't be the mining industry screaming no! no! anything but productivity! evil bad productivity! Make it go away!

foolking:

10 Nov 2014 2:18:11pm

We have some of the most practical and innovative people in the world here, so why can't we develop highly automated manufacturing and industry, we don't need to compete with wages if one person can now do the job of 50. So what's going wrong? Are multinationals effectively blocking innovation here, why should they invest in local business?

We need a steel manufacturer that produces the best steel in the world, whose profits go to Australians,either taxpayers or shareholders, but who will organize it or stump up the money?

Gordon:

10 Nov 2014 6:55:06pm

Foolking: who will stump up the money? Australians have had plenty of opportunity to invest in Australian enterprises of all descriptions, in a small way maybe, but it adds up. I don't see lotto & the nags scratching for pennies. The idea that investment is what other people should do is one of our real ball & chains.

We can develop anything we want. Expertise is not the problem The Japanese wanted to rebuild after the War, so they did what it takes. "what it takes" for us is an attitude shift of monumental proportions. Automation, and most other innovations was resisted tooth and nail in the industry we used to have.

Gordon:

10 Nov 2014 11:20:28am

Where do think banks came from in the first place? The egg & banana farmers needed a way of borrowing, saving and exchanging wealth. "Bank" the word is from Banco, or trading bench, in middle-ages Venice.

Steve_C:

So what's the going rate on foreign holiday travel, a new car, a home and food for your expected lifetime?

You got a kid or two you can guarantee will work for me loyally after I train them?

I expect total obedience, and they'll need to sign a contract that sets out their obligation to me... I will call the contract a "workplace agreement".

Rest assured; I'm a magnanimous barterer of kids for goods! They'll be guaranteed a lifetime of slaving away on my behalf, in order to earn just enough that they'll believe they're slaving away for themselves, while I manage to extract the vast majority of material benefits from their labour...

Now that I think about it; you got a wife as well? I'm sure we can sort out a deal for her as well.

And, are you planning on doing anything with the rest of what remains of your existence?

David Kay:

Jerry Attrick:

10 Nov 2014 10:13:16am

An unsettling truth in this piece is that Australia has begun (and continues) to lose all industry, except the primary ones that grow it, or dig it up, and ship it out and the ones that shuffle other people's money from one place to another while skimming profits from it.

By definition, this puts us pretty low on the list of "industrialised" nations and aside from highly imaginative shuffling of financial responsibility there is no innovative or futuristic promise in our economy. The renewable energy industry, which is a modern manufacturing industry and direly needed for the next few decades, is being scaled down, while the dirty old industrialists are raking continuous benefits from the nation's taxes.

Australia should be smart enough to join in the process of solving problems such as plastic pollution of the oceans, decline in marine resources of all kinds, and replacing the environmentally damaging energy generation industries, without adding to the catastrophes that appear increasingly likely a couple of decades away.

foolking:

Bruce:

The important piece a few days ago about the fragility of our transport fuel stocks resonates to almost every aspect of the Australian future.

It is not protectionism to preserve the capabilities to do most of what you would need to do if 'something' went wrong. It is good sense.

For us to sign binding agreements to cut off our reasonable self interests would be plain nuts.

With a broadly able capacity to produce core requirements, we can do a great deal of good at home and abroad. Staying with a flight-to-the-bottom Political Economic rationalism will blow up in our faces when any something serious happens.

It is 'when' not if.

Objectionable Protectionism involves things like Intellectual Property and restrictions - including the reliance on 'capacity to pay' - that prevent real needs accessing real help without greed getting in the way.

Peter the Lawyer:

10 Nov 2014 6:00:07pm

The history of this is that from Federation to Whitlam/Fraser Australian governments tried to build up local manufacturing by putting up high tarrif walls. Even into Hawke's time Governments were protecting local industires to some extent.

However, this protection didn't serve to build up our secondary industries because it often generated bad management and/or extreme empoyee demands. This was passed on to the public in high prices.

From the 70s on it was realised that the Great Depression had in fact been caused by barriers to trade more than anything else. Countries then decided to liberalise trade.

Out managers and our employees could have survived, but they were not clever enough to realise that they would have to compete, because they had been propped up for so long.

Now it is impossible for any national government to really just decree that we can have a manufacturing industry. And subsidies don't work here. Mybe we need a development corporation that loans money to start ups on thae basis that we get back interest on the loans.

dunces in Canberra:

Lee eel:

10 Nov 2014 10:15:33am

Remember, when you deposit money in the bank the bank becomes the owner of that money. Unlike storing something in a vault for safekeeping, a bank deposit transfers ownership. It makes implementing Cyprus style bail-ins very easy.

keith:

10 Nov 2014 10:21:18am

Well the banks seam to have it both ways don't they if i own then a dollar they come down on me like a ton of bricks they make billions with what amounts little concern for the customers savings other than how much of them they can get there grimy hands on they lend money to just about envy one and often try to get you to borrow more but if they fall on hard times i as a tax payer have to bail them out well mate ON WAY

if they cant hack it tough poo.....let them get there self out of it i think with what was it 7 billion dollars like one bank calmed to have made they can afford to put a lot aside for a rainy day.

maybe a super profits tax held in trust in case they start to cry poor......

saline:

10 Nov 2014 10:34:00am

How safe are our banks? As safe as our Federal Government. I suppose that means that, we, the people as the guarantors of Australian banks.

It is the duty of our government to put in place a cast iron contract with these out-of-control cowboys. There needs to be in place a deposit with the Government authority, which will cover their stuff-ups into the future.

The Government could tell the Banks to buy insurance commercially or from the government.

The Eggman:

10 Nov 2014 10:35:41am

It seems to me that these banking fears are just another symptom of how our economy has been basically hollowed out until all that's left is a fragile shell. The risk now is that 40 odd years of neoliberalism will come home to roost and crush us.

I know this article is about banking/financial risks, but it seems to me that the slavish pursuit of profits has created other big risks as well.

For example, just recently I heard that we have a month or so worth of fuel to keep things ticking over, that we have become a big fuel importer, and that our refining capability has been eroded away so that a hiccup in supply caused by say a war, terrorist activity (or maybe even a lack of funds due to a financial crisis?), means that our society could survive a mere few weeks before collapsing.

I reckon this type of risk is among the un-factored costs of globalization - everything has become linked into a far larger whole so it can all be brought down by a single event, or chain of events, that are so far removed from us that we have little or no power to influence or control them.

Public assets have been privatized, government liabilities and public debt is enormous, manufacturing has shrunk, regulations to protect us from the worst of the pirates have been removed and other regulations and agreements to help the pirates have been imposed with little or no consultation with the electorate, the environment is cactus, the haves have more whereas the have nots have less, and so on.

In the face of this, the public sector, which represents one of best protections against the worst in people, is under constant attack and is suffering from continuous cuts.

All most of us do is sit and take it.

In the mean time, the government, as well as the faceless men and corporations behind them, seem to fear that people will become unsettled because things are bad and may get worse, so they are ramping spy and secret police powers.

What comes next in the face of the next inevitable crisis caused by rampant selfishness and greed?

How will the government respond I wonder?

My guess is that they will not just socialize the losses, that mightn't go far enough, not when there are profits to consider. So they might also arrange a big fire sale to let their mates snap up whatever is left of this country at bargain rates.

And why not? It's not as if they don't have the power to suppress anyone who may disagree and god-money must be worshipped.

Curious party:

Saying the word 'guvvament' all the time does not substitute for having actual ideas.

Tell us how we are getting more and more regulations in our life. Are you talking about the new regulations to protect us from teenagers with ceremonial swords?

The problem is that governments that cut public sector positions don't also cut the standards at which the public sector frontline staff have to operate at. There are still just as many demands to complete back office jobs (OHS, expenditure requests, activity logging etc etc) but fewer back office staff to do them. This means that frontline staff have to spend have their time doing back office work, and subsequently service delivery suffers.

In order to have an efficient frontline service delivery in the public sector they either need to relax bureaucratic oversight, or they need to pay for more back office staff to fulfil the oversight demands. Continuing to do what both sides of politics are currently doing just harms the quality of public sector service delivery.

The Eggman:

10 Nov 2014 2:50:58pm

Call me old fashioned, but unlike anarchists, and pseudo anarchists of the neoliberal/free market persuasion, I accept that whenever people get together in groups they quite naturally create rules to ensure mutual wellbeing and to protect the commons.

Most of us would rather have more laws than just the law of the jungle otherwise that's how we would all be living - which makes me think that your apparent hatred of government and laws puts you in a fringe minority.

Neoliberalism has failed socially, environmentally, and economically, and that makes it a very poor framework to be a slave to. You can deny it all you like, but that market-god has failed to self regulate and the bad outcomes are heaping up.

It's now clear that a lack of sound regulations generates poor outcomes for the majority (although it may work very well for a time for a small minority of pirates) and thus the need for better regulations and their inevitable implementation.

Dame Paul Pott:

10 Nov 2014 2:49:40pm

On the news this morning we heard that the present generation will probably be the first in our history to be worse off than the last. That is what 40 years of neo-liberal economics has given us. Thank you Bob Hawke, thank you Paul Keating.

paul:

10 Nov 2014 10:55:15am

While we live under the stock market economy there will always be this system as we know it. What we need is a peoples economy, that is completely independent from the stock market. Some would say what well why not, well for it to happen banking laws would need to change. Some would also say what is he talking about.

A peoples economy would stabilise the banking system for the people by enabling a couple of basic changes. To start with a peoples bank or two or three would be needed. These banks would not give one cent of the peoples money to the stock market, thus from the start the banks and your money are no longer dependent on the stock market. Instead your money would be invested in schools, training centres, hospitals, farms, manufacturing and so on. The need for a stock market would be eliminated and the people will have a direct say on how and where their money is spent. This is because each and everyone of us would have voting rights as we are members of the peoples bank.

As we and our children progress through life our investments would be returned to us in the training and health facilities that are built. Housing would be available to everyone.

The need for politicians will be greatly reduced. In fact the community would one day say you are no longer needed as we have everything we need.

The system we now have is in its final days as throughout history every form and system of government usually has a 500 year life span. This system that we have now began in the 1500's.

tonyM:

OmegaEconomics:

10 Nov 2014 10:58:53am

Nice article Ian.

Most thought I was a lunatic when I spoke of structural public deficits and global financial melt-down in 2002. But right now, Aus has baked into the economic cake future risk premiums on foreign debt-issues - as our banks continue to use precious foreign exchange to generate price inflation for shelter. Meanwhile, Treasury and the RBA standby and do nothing.

That which is unsustainable has a habit of stopping. All the flat-earth economists will be proven wrong once again. Once foreign creditors realise we can NEVER re-pay our debts, because it has been blown by bankers lending for consumption and speculation. Our AAA federal balance-sheet will be toast.

Wottha:

10 Nov 2014 1:00:23pm

I hear what you say but I have to submit that there are only Flat Earth Economists. There are some who think the edge of the world abyss is real and there are many more who think the scene goes on forever.

OUB :

Aussie Sutra:

10 Nov 2014 11:45:36am

There needs to be protection, up to the standard and current limit, for depositors in the event a bank goes under. beyond that, the banks should have zero protection from taxpayers. Indeed, a bank owned by the government should be opened to provide low interest or no interest loans to homebuyers for the purposes of buying ONE house to live in.

Wave2me:

10 Nov 2014 2:44:25pm

The government did own a bank, and was unable to offer loans any cheaper than the listed banks, for the simple reason that they have to raise money in the same way, and pay all the same costs in regards to staff and equipment etc.

Victor:

10 Nov 2014 12:17:52pm

What our banks need, like so many of our institutions, is more competition.

Banks in Australia must guarantee all of the money deposited to all of it's customers at all times, we take that as a right here in Australia. But many banks in Asia don't have to do this, the amount that has to be repayed in the event of a default is usually limited to about $200 000 or so and this is the main reason that foreign banks don't want to come here and provide that much needed competition.

It might look a bit dicey on the surface of it, but banks are usually run by canny businessmen and they are not in the business of going broke.

Like so much in Australia, we are bogged down in procedural matters and red tape and this is more than an inconvenience, it is probably costing us dearly.

Gordon:

10 Nov 2014 1:33:35pm

Needless to say they did pay for it. The guarantee (which was never used once btw, no Govt money ever went to a bank) was charged for by the reserve Bank and made the Australian government a cool $5.5 Billion outright. The RBA is not in the habit of giving stuff away.

That this article and all the comments carry on like this was a European-style bailout of risky loans by long-suffering governments just shows the level of ignorance and cant our political debate suffers from.

The bank guarantee was a good and necessary idea done well, beneficial to all concerned, and agreed as such by anyone on either side of politics with a brain in their head.

foolking:

10 Nov 2014 2:28:48pm

Come off it Gordon: It may have been necessary but if it is repeated the outcome could be far worse. Why shouldn't a private corporate posting healthy profits be responsible for its own wellbeing? You are guaranteeing shareholders[gamblers] money first, not taxpayers, they are behaving like they ride shot gun over the govt. of the day.

Gordon:

10 Nov 2014 7:05:13pm

Did you miss the bit where I said they paid good money for it? Who else would they buy default insurance from at that time?

The Australian banks had not indulged in the silly loans & CFDs etc, they HAD acted relatively responsibly...there was limited actual risk but a strong perception of risk because of the global panic. The guarantee propped up the perception and turned a quid for the Govt.

I acknowledge the whole moral hazard thing: I do not LIKE propping up enterprises w/ taxpayer money. I recognize in this particular instance that the harm of a collapse would have hit ordinary Aussies harder than the bankers, and the support was tacit rather than actual handout, and it was not given away free. Best of a bad situation. THat's all.

tonyM:

10 Nov 2014 12:32:47pm

You can't seem to make up your mind where you stand.

One isn't sure whether you approve of bank stability or otherwise and seem to be floundering for any sensible conclusion.

During the GFC, banks worldwide were stabilised by Govts where possible. Do you really believe there was a practical alternative? Armageddon springs to mind which would have served no good purpose here.

You are equally equivocal when you say:

"As a nation, we've become a one-trick economy with one major customer, shipping unprocessed dirt to China."

This needs to be put into the context that, not long ago, you were here extolling the virtues of a CO2 tax. It would wipe out vast tracts of our few remaining manufacturing industries (like aluminium which mainly exports).

Then you complain that banks lend large amounts to housing. Make up your mind! Where exactly do you wish the banks to lend especially once the mining boom is over and we would like a pick up in the rest of the economy?

Perhaps you could make a case where loans attract a tax like in France (it is not small from memory something like 10%). That may be put towards a bank stability fund.

JohnnoH:

10 Nov 2014 12:33:29pm

Banks don't need bailing out by the taxpayer (they are private entities). Kind of reminds you of Fahrenheit 911 where it reported that during the GFC the American banks got $700B of taxpayers' money and congress "cut the red tape to make it easier" to the point that there were conditions put on who that money was supposed to spent and as a con sequence it was wasted on CEO and Directors' bonuses (sound familiar, especially the part about "cutting red tape to make it easier".

hoolibob:

10 Nov 2014 12:44:18pm

Legislate for banks provision of inhouse income protection as part of all housing loans to the value of mortgage existing or new. A maximum variance range for interest rates for the entire term of the loan. In short responsible lending, consumer protection & a banking lobby working to keep interest rates low & stable. An investigation into procedures of all banks eg. currently CBA practice is back dating chq deposits to the chq date in the payer's bank account whilst the payee doesn't see chq clearance until the maximum clearance days. This gives the bank the benefit of interest on this money for the period between. Govt legislation fining banks per transaction for illegal fees charged previously that have not been refunded with interest.

lilly:

I'd be very surprised if the government went against the banks; their lobbying power in Canberra is immense.

This article does highlight an interesting fact: the bank's investment portfolio is concentrated mostly in one area: the Australian property market.

I wonder if this has been a deliberate strategy by the banks (which I'd doubt) or whether it is a consequence of Australia not having any significant manufacturing sector meaning the bank's principle customers are property buyers (the most likely reason)? I also wonder if the banks realise the risk they are carrying and so put pressure on the government to maintain high property prices and therefore protect their investments?

I'm pretty sure that the current state of play is maintained through the combined lobbying power of the big four banks to maintain the status quo. It illustrates yet another reason this country needs political reform.

There needs to be a separation (quite a big one) between government and business. Part of the government's role is to set up the conditions in which business can operate however the the government should never become dependent upon business. They are at present as business forms a principle source of political donations. This must end.

OUB :

10 Nov 2014 2:41:36pm

I gather the risk weighting of home loans is quite low so banks don't need to hold as much capital against those loans. Risk weightings would be assigned by the regulators I presume. Can't blame the banks for that if it is beyond their control......

lilly:

I'd be very surprised if the government went against the banks; their lobbying power in Canberra is immense.

This article does highlight an interesting fact: the bank's investment portfolio is concentrated mostly in one area: the Australian property market.

I wonder if this has been a deliberate strategy by the banks (which I'd doubt) or whether it is a consequence of Australia not having any significant manufacturing sector meaning the bank's principle customers are property buyers (the most likely reason)? I also wonder if the banks realise the risk they are carrying and so put pressure on the government to maintain high property prices and therefore protect their investments?

I'm pretty sure that the current state of play is maintained through the combined lobbying power of the big four banks to maintain the status quo. It illustrates yet another reason this country needs political reform.

There needs to be a separation (quite a big one) between government and business. Part of the government's role is to set up the conditions in which business can operate however the the government should never become dependent upon business. They are at present as business forms a principle source of political donations. This must end.

Aeon:

10 Nov 2014 2:26:22pm

I agree, but political reform is unlikely. We do need it but it's not going to happen within the system we have. We can talk about this until the cows come home but it will be always defeated one way or another by those who are too wealthy and too powerful to want this kind of a change. In Australia where fascism rules behind the fa?ade of democracy and the super rich own the government, the best you'll get is 'the dogs are barking but the caravan moves on'. Meaning nothing! Fascism is hard to eradicate once it sets in but it will happen because the greed of the wealthy knows no bounds. This greed will exterminate them when the population decides that enough is enough.

That will be the third world war and considering that horrible weapons of mass destruction will be used, it will leave nothing or very little for the 'winners'. As always prevention would have been better but it's too late for that.

Aeon:

10 Nov 2014 4:32:45pm

"It illustrates yet another reason this country needs political reform."

I agree, but political reform is unlikely. We do need it but it's not going to happen as part of the system we have. We do not have a democracy as many believe. Therefore we can talk about this until the cows come home but it will be always defeated one way or another by those who are too wealthy and too powerful to want this kind of a change and their lackeys. In Australia where fascism rules behind the fa?ade of democracy and the super rich 'own' the government, the best you'll get is 'the dogs are barking but the caravan moves on'. Meaning nothing beyond a debate. Fascism is hard to eradicate once it sets in, but it will happen because the greed of the wealthy knows no bounds. Their own greed will be their undoing in the end and when the people decide that enough is enough we?ll have a war. Not just any war but the third world war. And considering that horrible weapons of mass destruction will be used, it will leave nothing or very little for the 'winners'. As always, prevention would have been a better option but it's too late for that.

Esteban:

The deposit guarantee was not necessary. The banks that were in trouble were not too big to fail they were too Queensland to fail.

Some small Queensland banks were in trouble in Australia because money was pouring into the large and safe banks from the smaller banks.

Of course a Queensland PM and Queensland treasurer had to do something so they guaranteed deposits and it saved a couple of Queensland banks.

No Australian has lost deposit money in Australian banks for over 100 years. When the smaller ones get into trouble the big ones absorb them and the system stabalises.

Our big banks could have easily taken over the Queensland banks like they have in the past and like they will again in the future but the Government did not want that to happen for political reasons.

It worked for St Geroge and Bankwest during the GFC when these non Queensland banks were seamlessly taken over by the big banks.

The wholesale guarantee was not because the Australian big banks were weak. Pretty much every Government around the world had taken steps to guarantee their domestic banks. This left the Australian banks on an unlevel playing field and the Government was left with little choice but to follow suit.

Ian Verender calls this guarantee a bail out which would raise gales of laughter in Europe where bank bailouts have cost the tax payer billions of dollars of lost money gone into banks.

In Australia the banks will be paying over $5 billion to the Government for the wholesale guarantee fee. No Government money has been wasted on our banks. The banks have paid the taxpayer.

It is reckless and wrong to claim that Australian banks were bailed out.

Wave2me:

10 Nov 2014 2:42:20pm

I don't agree that it wasn't necessary, it was for the reasons you stated, that other countries had done it, and money was moving from our banks to banks that had gone broke and were nationalized, and or had a guarantee in that country.

The government was just leveling the playing field, and got a good source of revenue for there trouble.

CBA Snapped up BankWest because it was a good bank, very profitable, well run, and HBOS was going broke and selling its best assets at a markdown price to cover its losses in other areas.

Wave2me:

10 Nov 2014 5:57:49pm

My impression at the time was that while money was flowing from small banks to big, it was also flowing from the our big banks, to those in countries where there was already a guarantee, such as Ireland.

That had that flow continued, not only would our small banks be at risk, but so would the large banks.

It was clear that the small banks were at greater risk, but interestingly, when the wholesale Guarantee came in, they were charged more by the government than the big 4, due to them having a lower credit rating.

It was also interesting the way deposit rates jumped up as banks competed for deposits to fill the hole left by the bond market.

As a Broker, I was talking with people from a number of banks, and there were some very worried people, in terms of raising money.

I think the guarantee was the right thing for the government to do at the time.

I do agree about the big 4 being portrayed as the villeins.

What would have been good, is if non in any country had been bailed out. That would allowed Australian banks to expand and pick up some more good buys.

Esteban:

10 Nov 2014 6:44:37pm

It was certainly getting tougher and more expensive to raise money but the markets were not completely shut. The big banks would have survived without the guarantee but the banks would have had to pay more for the wholesale funding.

The RBA interest cuts were not being fully passed on as it was let alone even higher wholesale funding.

The cost of wholesale funds guaranteed by the Govt plus the fee to the Government turned out to be cheaper than unguaranteed funding without a fee.

No wonder the banks got stuck in and took advantage of the cheap money. They took advantage of the cheap money when it was available for the 6 months that the wholesale guarantee was in place but that does not mean that they needed the guarantee in place.

I am generally a "let the market sort it" type of person and the market would have sorted our banks out but it would have been messy and higher interest rates would have been recessionary.

I think the guarantees were probably the best thing that Rudd did in response to the GFC. Certainly we lost no banks, interest rates did not go up because of a shortage of funding and the Govt will have received over $5 billion in fees by the time the guranteed debt reaches maturity.

foolking:

10 Nov 2014 2:43:17pm

But the article is saying that banks should have better facility to protect themselves and act more prudently, this is more about the shareholder being protected than the mortgagee, 5 billion is their combined profit in one year. It's not reckless or wrong to claim they were bailed out. Banks do not represent the mortgagees, they represent their private selves.

steve2:

10 Nov 2014 1:24:26pm

If you drop the current fiat money system and go to a crypto-currency system all transactions are recorded on the block chain, the government does not control the amount of currency issued, all lending is peer to peer and all transactions are instantaneous and fee free.

Then we do not have a need for banks at all.

Eventually this will happen, the longer we wait the longer we will suffer from the gigantic bloated banking parasites that almost destroyed the world economy in 2008 and are set to do it again and again and again.

mt_syd:

10 Nov 2014 1:55:50pm

bitcoin suffers from some of the same problems as a gold backed currency

the main one being that the amount of money cannot grow as the economy grows. The inevitable effect is deflation, shrinking wages, debts which become increasingly hard to pay off, and general stagnation

ted:

10 Nov 2014 2:03:41pm

The Big4 have had a long history of pushing around successive govts.

From 1st Jan 2015 the rules change at the global level.

I think APRA has to date been too soft, hiding from the Bank of International Settlements the real state of bank balance sheets and the corresponding stability of the national ledger. For example, I believe APRA did not advise BIS of how much commercial debt sits inside the banking system, and also it seems to have down-played the inherent danger of the large pool of investor loans (on very high LVRs) in the system. BIS, tasked with rolling out the BASEL III regs turned a blind eye.

Who is going to wear the responsibility of a system failure?

Govt/APRA or BIS?

Who is going to pay? You got a job right? You like more tax, or you prefer the govt tighten rules?

Wave2me:

Does BASEL III attack or deal with the issues that led to a situation that required the government to come allow our banks to buy a guarantee from the government?

I think the answer to every one of these questions is No.

I Believe that Australian banks should be well regulated, and well run.

I think BASEL III is a political fix for the governments of the EU and USA, so they can look like they are doing something, and look like they are extracting something from the banks.

Bearing in mind, not a single Australian bank lost money, not a single bank failed to pay back lenders, not a single Australian bank was handed cash by our government, I thin Australia should be very cautious about implementing rules drawn up by countries that did have all these problems.

We have much better legislation around good banking practice than any of these countries, and that shows in the result.

The biggest reform in BASEL II seems to be around they size of liquid assets that need to be held in reserve for an emergency.

There seems to be little in terms of what happens with that reserve if there is an emergency, and little on preventing an emergency in the first place.

We have good regulation, we should continue to develop and modify our own regulation as we see fit.

We should not simply adopt the political fixes from the USA and EU. That is a recipe for disaster.

Wave2me:

At no times has he revealed that the Australian Government did not outlay a single cent in his supposed bailout.

At no time has he revealed that the Australian Banks paid many Billions in fees to the Australian Government for the Guarantee.

At no time has he discussed why the guarantee was needed, other than to let it be known the banks were having trouble raising money in other countries. Why was this so?

At no time has he discussed the decisions of governments in other countries providing both billions of Dollars and guarantees to their banks, and what the knock on effect was to our banks. Why were banks that were bankrupt, huge default rates, losing billions and being bailed out by governments able to raise funds, when ours that were making profits, unable to raise funds?

At no time has he discussed if greater reserves proposed in reforms would in fact resolve the problem that occurred.

At no time has he discussed that a big part of the potential problem was in fact commercial and business lending. What would happen if all those commercial loans had to be called up, or could not be rolled over at the three year mark?

At no time in reference to the GFC, has he compared the default rates on Australian loan books, or losses on Australian loan books to those of the banks they were in fact bailed out to the tune of many billions of actual money.

He talks about the lowering of cash set aside for bad debt, but fails to mention that during turbulent times such as the GST, the banks increased by billions the amount set aside for that purpose.

In fact, the article is devoid of any real detail that could in anyway back up his opinion, that it is astounding it could be published.

My expectation of our government, is that when other countries take actions that have a huge negative impact on the Australian people, that our government responds.

In this case, actions over which neither our government nor our banks had any control, was going to have a huge negative impact on our finances sector, and a knock on effect on almost every business sector, and people who wanted to buy homes, in fact on everyone.

The government was able to fix this, without paying a single cent, and in fact collected billions in the process.

ardy:

10 Nov 2014 2:24:59pm

It's not only the banks that are causing Australia to slip. Our unions have a fair load to carry, the cost of labour, linked with the lefts industrial relations handcuffs to stop people getting sacked, means that many young Australians struggle to get full time work.

In a country where a airline steward earns over $100k is a form of madness that can only end one way. The average income of a GM worker was nearly the same and had some of the maddest lurks and perks on the planet. Still you lefties all think this is fine and it is all Abbotts fault anyway... Hope you live to reap the harvest.

spacey 101:

10 Nov 2014 2:39:21pm

After working in the retail banking industry for 10 years what the author says is true. From the tellers through to service staff, sales staff and branch managers each and every day one thing and one thing only was drummed into us: home loans, home loans, home loans.

steve2:

The greatest sustainable growth in the world economy was in the 19th century and the 1950 decade. Both were under a gold standard.

The growth under fait currencies since 1973 when the standard was abandoned has seen debt balloon to gargantuan proportions at the expense of real economic growth.

There are 20 million bitcoins possible and each one is divisible to eight decimal places. So that does allow expansion and there are many other cryptos that have even more capacity than that.

I do not know which crypto will be adopted, or if the future is competing cryptos, here is no perfect system but the one we have now has failed, will fail over and over again destroying lives and savings each time, is currently broken and cannot be fixed.

OmegaEconomics:

10 Nov 2014 3:12:19pm

Gordon,

You fall in to the same trap as many non-economists. Just because you the taxpayer has not transferred money to a bank - does not mean that it does not cost the taxpayer. The taxpayers AAA Budget is subsidising bank lending by lowering their cost of funds. This leads to a 'collateralisation' back onto the public balance-sheet - progressively undermining ts AAA status as leverage and financial risk against the taxpayer guarantees, rise. Eventually the public balance-sheet will be so loaded-up with contingent liabilities - it will be downgraded. The market value of this benefit transfered from taxpayer to bankers can be valued by taking-out a hedge of equivalent value. The subsidy is many billions of dollars a year.

Likewise the guarantee on wholesale funding and deposit guarantee allows banks to earn far more income against their reserves - driving their competitors to the wall.

InWA:

10 Nov 2014 3:23:06pm

To all those who are dumping on the farmers... If there wasn't some support, we'd be importing nearly all our food. Farming is nowhere near as profitable as it used to be but someone has to supply us with this life giving source. If we were to import everything, then the prices we pay now would seem like a long gone good memory. There are some industries that should not be left to market forces because they are things we cannot live without.

When we have to import all our dairy, bread, eggs, fruit, veggies etc. then we're held over a barrel. Does anyone want to pay $15 for a loaf of bread? Or $10/dozen for a carton of eggs? When you have a cornered market then suppliers can demand any price or withhold the product.

Gody A.:

10 Nov 2014 3:23:28pm

Annul negative gearing and you annull the chance for people to A) have a controlled, by themselves, super annuation, and B) the possibility for people to inhabit low rental properties - so essential especially for young people leaving home for the first time and trying to establish themselves. With or without a partner.

S:

10 Nov 2014 3:55:49pm

How did this discussion about the irresponsible behaviour of Banks deviate to farmers, mining and property?!!!

The Government appears to be really cosy with big banks, eg attricious Commonwealth and Maquarrie debacles. Government refuse to investigate and apportion damages. This is left for the banks to do themselves as they may think fit. Conman and his portly cigar smoking pal seem to think that this is quite in order and that the banks involved will do the right thing ....Pull the other one, they will do as little as possible just as they have done to date, and joe public will be shafted yet again. We really need a good, honest arms length ombudsman to exert some controll.

Paul Taylor:

10 Nov 2014 5:35:43pm

Taxpayers now certainly do need protection given the current Federal Coalition governments moves to water down greater financial regulation introduced by the former Labor government together with moves to defer increases in the rate of national superannuation increases.

There is a disturbing nexus of about 80 per cent of gross foreign debt and 75 per cent of net foreign debt accounting for almost all of our foreign liabilities sitting on one side of the 1st Tier 4 pillar major bank balance sheets (borrowings) and on the other side of the ledger their assets predominantly lending to households vulnerable to a rise in mortgage interest rates ( already at a record low), the prospect of higher unemployment and even greater control of the financial sector, namely through superannuation management funds.

The major political parties do not like to talk about net foreign debt which for the sake of simplicity represents the total of all Australian government and private foreign debt minus what foreigners owe us. In December 2009 Gross foreign debt stood at $1,219 billion, net foreign debt stood at $648billion and Foreigners owed us $571billion....only 10 per cent of the net foreign debt was owed by the government and the vast bulk of what Foreigners owed us was through Australian superannuation investments overseas ( now becoming under greater influence of the major Australian banks).

We are faced with the prospect of a Free Trade Agreement between Australia and China where our major banks and service industries are given greater access to the Chinese market at the expense of Australian business through reduced tariffs in key industry areas but limited or not reciprocated by China, while China is given access to $1 billion direct investments in resource areas of comparative advantage without a proper cost benefit analysis by the Foreign Investment Review Board. Of course there will be the odd industry sweetener as a mark of the deal being all encompassing! If the Australian banks make investment blunders in China who do you think will carry the can....Australian Taxpayers! Net foreign debt does not show the full impact of private debt: total household debt was $1.84 trillion in December 2013 ( financed from overseas and domestic savings). The Coalition government may keep a rein on government borrowing re government debt but achieved by transferring liability to the private sector and greater direct foreign investment which will now include China. Where is their articulated game plan for sustainable economic development(economic, social, environmental) apart from selling off government and national assets of significance to the national interest?

xstephen:

10 Nov 2014 6:44:47pm

It seems far too much has been directed into housing and not enough towards production. Possibly the risk for housing is too low as compared to other investment for lenders, or the return is just too good. I think our policies have been lazy, and the Banks have taken advantage of it. How to ease out of the situation without disaster is the question. I do think a first step would be phase out negative gearing for existing properties. This would curb capital appreciation as many would opt out of their investments. Our policies also discourage saving and encourage risky 'investment' (perhaps gambling is more appropriate) by uninformed people. Our Governments (both Labor and Liberal) have failed to produce the environment where Australians can excel on the global stage. Luckily we have few people and lots of room for agriculture and resources. Those same factors should help us as the business need for people declines in favour of cheaper robotics etc. Global unemployment will be a huge issue. But in Australia she'll be right, maybe.

ram:

10 Nov 2014 8:50:14pm

Any serious investigation into the big four Australian banks derivative positions would show they are horribly exposed. Worse than the big American and European banks? No, but it looks like they will all go down together.